Q2 2023 Qorvo Inc Earnings Call
Greetings and welcome to the core of our second quarter 'twenty 'twenty three conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference.
Please press Star zero on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Douglas Toledo, Vice President of Investor Relations. Please go ahead.
Thanks, very much Hello, everybody and welcome to <unk> fiscal 2023 second quarter earnings Conference call.
This call will include forward looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the safe Harbor statements contained in the earnings release published today as well as the risk factors associated with our business and our annual report on Form 10-K filed with the SEC.
Because these risk factors may affect our operations and financial results in today's release and on today's call. We provide both GAAP and non-GAAP financial results, we provide supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain noncash.
<unk> expenses or other items that may obscure trends in our underlying performance.
During our call our comments and comparisons to income statement items will be based primarily on non-GAAP results for complete reconciliation of GAAP to non-GAAP financial measures. Please refer to our earnings release issued earlier today available on our website at <unk> Dot com under investors.
Joining us today are Bob rug risk President and CEO .
Grant Brown, CFO and Dave forward, Senior Vice President sales and marketing as well as other members of <unk> management team and with that I'll turn the call over to Bob.
Thanks, Doug and welcome everyone to our call corporate delivered fiscal second quarter revenue and EPS above the midpoint of the outlook provided during our August 3rd earnings call.
As we indicated on our call cordless business is now organized into three segments.
High performance analog.
Every in sensors and advanced cellular.
In high performance analog revenue during the September quarter was broad based with strength, primarily in defense and higher power applications.
In connectivity and sensors headwinds in consumer markets and related inventory drawdowns impacted revenue as expected even as favorable design activity was diversified across a growing list of customers and product categories.
As a reminder, connectivity and sensors combines the connectivity and sensors businesses previously split between mobile and IBP.
Lastly, an advanced cellular we enjoyed a large customer win during the quarter.
While unit volumes were weak in the Android ecosystem, we were encouraged by content and integration trends across oriented customer base.
<unk> designs.
With our new operating structure and global sales organization Corvo, we'll capitalize more quickly on opportunities across markets and customers to support growth, we will leverage our core strengths and system solution design.
Semiconductor manufacturing.
Vince packaging technologies, and deep relationships with customers and suppliers to help enable a world that is more efficient more secure and more connected.
Now, let's turn to some quarterly highlights.
In high performance analog Corvo signed an agreement with <unk> for a long term supply of silicon carbide wafers.
Cobalt has achieved four consecutive quarters of sequential growth in our silicon carbide business.
Our expanding relationship with <unk> will further diversify and strengthen our supply base and help support continued growth in our power device business.
We released a portfolio of advanced fourth generation Silicon carbide surface Mount for.
Patients required maximum efficiency and low loss these.
These include DC to DC converters, SaaS, DC Chargers onboard Chargers industrial Chargers and server power supply.
New <unk> product introductions included a five watt <unk> module for massive mimo cellular base stations and again power module for upcoming DOCSIS four <unk> systems.
For power management market, we introduced the highly compact power management IC designed to enable reconfigurability and reduce our customers' time to market and space constrained applications, including home automation and networking systems.
And connectivity and century, we achieved matter one dog zero certification and commenced shipments of matter development kits, featuring concurrent connect technology to simplify the design of Iot gateways and connected devices.
We broadened our smart home product portfolio, leveraging our ultra wideband and matter system solutions, and we expanded our ultra wideband design engagements, serving enterprise applications, including indoor navigation.
We expanded connectivity and sensor design wins supporting top tier automakers across a range of applications, including infotainment.
Activity secure car access and EV smart interiors.
And Wi Fi, we secured a broad range of Wi Fi six Wi Fi six design wins in support of 2023 platforms and launched five gigahertz and six gigahertz filters for European band Wi Fi six feet and Wi Fi seven applications.
And biosensors, we launched commercial trials of our COVID-19 diagnostic test platform with multiple retail health care outlets and we began production of flu a b cartridges for clinical trials and support of National Institutes of health initiatives.
And advanced cellular we increased shipments of phase seven lease solutions, while securing additional design wins.
<unk> low band mid high band and.
Also high band integrated placements across multiple smartphone Oems.
We commenced our first production shipments of our high performance Mems based antenna solutions and we expanded our men's customer engagement to include top tier smartphone Oems.
<unk> Mems based antenna solutions reduce insertion loss and enable significantly improved system performance.
Out of Korea based smartphone OEM, we expanded our content opportunity by securing our first low band pad wind in their flagship smartphone.
This win complements other content, we are secure and support of our upcoming 2023 launch court.
<unk> will supply integrated placements supporting the main and secondary transmit mid high band as well as antenna tuning and Wi Fi solutions.
Lastly, we introduced by highly integrated mid high band pad, combining main path and diversity receive content.
We will be sampling this product to customers in the first half of calendar 'twenty, three and we expect design wins to follow and support our future Stellular architectures.
Across core goes business and high performance analog connectivity and sensors and advanced cellular cordless markets are leveraged to multiyear secular trends like electrification sustainability and connectivity.
We are at the forefront of advances and defense radar Comms electric vehicles battery power tools and appliances.
Wireless and wired infrastructure smart home automotive productivity precision location and advanced cellular architectures.
We are a technology leader and we provide best in class products to a growing base of customers.
In the near term the Corvo team is performing exceptionally well as we navigate ongoing weakness in our end markets.
We are reducing factory loadings, and bringing down our own inventories, while helping customers to reduce inventory in the channel.
At the same time, we are continuing to drive process and product development and have accelerated our efforts in support of future growth.
Recent process development efforts, including the introduction of <unk> next generation <unk> technology, which extends the range of our soft filter portfolio to cover higher frequencies.
Our newest <unk> products will be complementary to our bar products and will be featured in our most highly integrated placements.
It will be manufactured in our fab in North Carolina.
Recent product developments also include our recently introduced mid high band pad, combining main path and diversity receive content.
This highly integrated solution leverages, the reduced size and enhanced performance over a bar filters to integrate nearly two times the bar filter content in a smaller footprint than is currently available in mid high band architectures with just the transmit functionality.
As we have said previously next generation protocols continue to require higher performance content and customer architectures continue to favor higher levels of integration and functional density.
We're launching new technologies, and new products to fuel design win and drive content and higher growth end markets.
We expect these efforts to support growth as inventories adjust and volumes recover. We also expect to increase our growth rate and drive leverage as our investments play out in our higher growth businesses.
I want to thank the team for continued operational excellence, we are delighting customers with pet's best in class products and technologies, even as our markets on the growth extraordinary events.
We are adjusting quickly to supply and demand imbalances and positioning the company to drive sustainable long term growth.
With that I'm glad to hand, it over to grant.
Thanks, Bob and good afternoon, everyone.
As a reminder, our references today will be two or three new operating segments.
Our formats analog or HPA connectivity, and sensors group or ESG and advanced cellular group or ACG.
And our upcoming 10-Q, we will provide historical financial information, which has been retrospectively adjusted to reflect these new operating segments.
Additional historical information will be made available in our fiscal Q3 10-Q in fiscal 2023, 10-K, I'll now turn to our latest quarterly results.
Revenue for the second quarter of fiscal 2023 was $1 billion $158 million 8 million above the high end of our guidance HPA revenue of $228 million was up 8% sequentially and 47% year over year, driven by strength in defense and non consumer related.
Power products, including Silicon carbide.
Connectivity and sensors revenue of $143 million was down 6% sequentially and down 19% year over year due to weaker consumer electronics spend primarily for Wi Fi enabled products.
Finally advanced cellular revenue of $787 million was up 17% sequentially, representing a strong seasonal ramp in year over year growth at our largest customer, but down 15% year over year, reflecting lower smartphone unit volumes within the Android ecosystem.
On a non-GAAP basis gross margin in the quarter was 49, 2% the quarter benefited from product mix effects offset by higher inventory related charges and the beginning of planned reductions in factory utilization.
Point of our guidance range.
Free cash flow was $220 million capital.
Expenditures were $47 million, and we repurchased $160 million worth of shares during the quarter.
Today, we announced that our board of directors has authorized a $2 billion share repurchase this authorization will replace the prior authorization, which had a remaining balance of approximately $350 million as of October one.
The rate and pace in which we repurchase shares is based on our long term outlook low leverage alternative uses of cash and other factors.
Turning to the balance sheet as of quarter end, we had approximately $2 billion of debt outstanding with no near term maturities and $914 million of cash and equivalents we.
We modestly reduced our inventory balance in the quarter to $841 million, despite seasonal product ramps and the macroeconomic environment.
Now turning to our current quarter outlook, we expect quarterly revenue between $700 million and $750 million non-GAAP gross margin between 43%, 44% and.
And non-GAAP diluted earnings per share in the range of 50 to.
75.
Our current view of the second half of the fiscal year reflects ongoing weakness across end markets, primarily in consumer related areas as well as a more acute inventory correction at our Android smartphone customers than was previously predicted.
We expect sales to China based Android smartphone Oems to represent approximately 10% of total revenue during the December quarter. We expect this will mark the low point in our Android based customer revenue.
And in the March quarter, we continued to project Android based revenue will grow sequentially.
At the volume levels assumed in our guidance, we expect our inventory positions remain elevated but improved by the end of the fiscal year as we under shipped normalized demand and reduced factory utilization.
Simultaneously, we are cutting costs in our factories to offset the impact of lower volumes.
Unabsorbed fixed costs will impact gross margin in the second half and we currently expect non-GAAP gross margin for the full fiscal year to be approximately 47%.
We project non-GAAP operating expenses in the December quarter will be down approximately $5 million to $7 million sequentially, reflecting continued cost discipline across the organization and lower variable compensation offset by continued investment in growth areas.
Although the operating income line other expense will be approximately $15 million, reflecting the interest paid on our fixed rate debt offset by increasing levels of interest income earned on our cash balances along with other items.
Our non-GAAP tax rate for the balance of the fiscal year is expected to be between 14, five and 15% due to the absolute level and geographic mix of pre tax profit, including FX related gains within high tax jurisdictions as well as the impact of a U S tax law change.
To R&D capitalization among other factors.
Turning to our operations I'd like to highlight the great work our teams have been doing to improve productivity as an example in our Richardson facility. We have significantly increased the effective capacity of our BARF filters within the same factory footprint. This has been achieved across a number of initiatives spanning product development filter design.
Process engineering and manufacturing efficiencies.
Excessive generations of <unk> technology have and will continue to meaningfully reduce die sizes and increased die per wafer manufacturing efficiencies such as the move from six inch to eight inch wafer diameters as well as ongoing processing advancements will further increase effective output.
Combined effects of these achievements will allow our richardson facilities to support significant revenue growth.
Looking forward, we have the ability to approximately double our output within our existing footprint in Richardson.
Despite the macroeconomic challenges impacting customers our long term outlook remains positive product performance requirements continues to increase and our end markets and connectivity and electrification trends are accelerating we.
We have grown our opportunity set across markets customers and product categories, while maintaining our commitment to technology leadership.
Portfolio management productivity gains and reduce capital intensity.
This has supported strong financial performance during a challenging environment and positioned corvo exceptionally well for long term increasingly diversified growth at.
At this time please open the line for questions. Thank you.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Your first question comes from Tasha Hari with Goldman Sachs. Please go ahead.
Hi.
Can you hear me okay.
Yes, we can.
Okay wonderful thanks, so much for taking the question.
I guess I had a question on your business in China.
Can you kind of provide some some contracts.
How significant your revenue in China was in the quarter.
Thank based on when you guys reported last quarter, China was about <unk>.
<unk> of your business overall, it had to do in the September quarter.
And what's the outlook going into December and the March quarter.
Sure. Thanks for the question.
I'll take that one.
The China base revenue in the quarter was down approximately 20% quarter on quarter.
About 45% year on year, just to put it into perspective looking forward.
In the prepared remarks, we're looking at that.
Android based China revenue down to approximately 10% of the overall revenue for core goes so a substantial decline both.
Both quarter over quarter and year over year.
Got it and then as my follow up on gross margins probably for you Greg.
Based on your full year commentary on outlook, the implied gross margin trajectory into into margins, probably down a little bit off of that.
43, 5% guidance provided for December .
But beyond March I know, it's early but how should we think about the path for.
For you to get back to the 50% or 50% plus I know you're going through a very sharp correction.
You're cutting relocation rates, but.
<unk>.
The pace and timing of that which you can you can improve gross margins in calendar 'twenty. Three if you could provide some context on that would be super helpful. Thank you.
Sure.
Related to gross margin as you pointed out is heavily influenced by both mix and the utilization impact currently the dominant headwind is the underutilization, which is generating over 700 basis points of headwind. So we have a clear path back to 50% gross margins beyond that utilization impact.
The demand that we're seeing today.
We don't typically report utilization by factory, but I think it would be a meaningful metric just to cover very quickly by location as an example for instance.
If we look at utilization in Germany. It supports our broadband business, which has actually seen some strength.
So the utilization there is is doing okay, and the migration to the new DOCSIS standard is helping support that factory and the volumes. Alternatively, if you look at our North Carolina gas Fab for instance, it's running very low levels of utilization, which impacts our margins and Wi Fi business for <unk>.
Larger sites like Oregon, and Texas are also underutilized given the unit volumes, we're seeing from customers.
As they work through the inventories and the soft demand environment and similarly, our assembly and test operations in China remember remain under loaded as well.
All of this under utilization creates costs go unabsorbed into.
Higher inventory volume it negatively impacts the margin I would expect that to resolve as volumes return and we will have a clear path back to 50%.
As that factory mix and volumes both return in terms of margin.
Obviously, a lot of moving parts, there and other factors, but the Underutilization is the primary one.
Your next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hey, guys I want to pick up on the last line of questioning and.
You seemed to insinuate that there is a path back to 50% gross margin when these under utilization charges sort of work their way through that is there a natural resolution a path to two the situation or whereby management have to make some decisions on in terms of a.
Defensive realignment with the manufacturing footprint.
Sure there is a number of opportunities for us to improve margin looking forward, we are reducing costs in the factory today, primarily variable costs.
We can alternatively.
Look at the utilization that we can bring down which we've commented on previously.
The underutilization as we see it today is something that will resolve as we're under shipping and under building to what would be a more normalized demand environment. So as that returns to normalcy I would expect the underutilization to aleve itself. The other items in gross margin and there are others, but they are much less cigna.
<unk> for instance, inflation is one where it might be running approximately 50 to 100 basis points as a headwind today, but but again its it paled in comparison to the utilization impact.
There is pricing, which factors into it but theres.
Nothing that we're seeing there outside of what we expect in historical norms. So again going back to utilization. It ultimately relates to the volumes we see in the volumes, we're seeing right now from customers and the demand levels are intimately related to the macroeconomic effects we've talked about.
Okay I appreciate the comment that.
China, Android handset Oems represented $70 million to $75 million of your December quarter outlook.
And I presume the Android handset customer base overall would represent somewhere between $200 million to $250 million in the same quarter.
And <unk>.
Assuming that that is the bottom.
I'm curious to know how does the other portion of the business trend looking out into the into the March quarter.
Sure.
You are right there is weakness beyond simply Android I mean.
Both the consumer and the enterprise spending on our customers' end products has continued to be a challenge.
Our customers have had to reset their production to adjust to the lower levels of demand and certainly the inventory that they're carrying it varies by end market certainly in the inventory challenge in the Android ecosystem as is probably the most impactful, but we are seeing it in our Wi Fi business as well, we're seeing across both access points routers.
We're seeing it in power management products for power tools.
We're seeing it in ssds, which is another area that <unk> seen some weakness in.
Looking out forward in time, I expect again, those those could be similar stories and that they will recover and the volumes will return.
Thanks, guys.
Thank you.
Next question comes from Vivek Arya with Bank of America. Please go ahead.
Thanks for taking my.
Question for the first one.
Yeah.
You gave a 47% gross margin number for the full year that kind of suggest March sort of flattish in terms of sales and gross margin just wanted to see if you could.
Quantify that and then.
Bob My question is what does the company look like for <unk>, because when I go back to before the cycle started.
But in the 750 800 million.
Last few quarters that jumped up to 1112, but that was in.
In hindsight about demand.
So does the company mean youll get to somewhere in the middle of where you were pre <unk> and where you went in the last few quarters.
You can exceed.
The recent quarterly.
Accordingly.
Thanks for the question Vivek. This is grant let me take the first part and then I'll, let Bob address to your second question.
First and foremost we won't guide into March formally but we did comment on the Android based revenue, which we do expect to be up in the March quarter.
And then in terms of our largest customers seasonally you would expect that to be down. So there is some offsetting effects there.
To see how that plays out the rest of the business, we expect to be approximately.
Approximately flat to slightly up in certain different areas.
This is Bob Thank you for your question.
Yes, you are correct that there has been some inventory build but I want to also point out that.
We're not anywhere near the number of <unk> phones that we expected to be at our number now is pushing closer to 600 and if you recall when we started the year. We thought it was going to be closer to 700, plus so that's a pretty big drop and Thats, what built up the inventory.
It's still our expectations to get past, where we were at that $1. One $1 2 billion over time, we've got a lot of growth drivers in our portfolio today each of the business segments and we've talked about this.
As far as the advanced cellular we still believe we can grow.
Mid to upper single digits, we still believe we have room to grow and our largest customer and a lot of ball content as we look out over the years and then if I move into what we're seeing in the high performance analog business. We've got several growth drivers. There. We think defense is going to be a good business for multi years, we followed that up with what we're seeing in infrastructure and what were <unk>.
Bringing to that market segment with our Gan modules that we spoke about here. We're excited about the <unk> rollout in India, because that's going to be supported primarily out of our European customers and then if I look at the power market that Graeme talked about today is a little bit off because of what's going on in the data center market, along with electrical power tools and things like that but we're taking that.
Product and the multiple.
Markets right now and expect that to grow very nicely and then our power device business.
You just talked about the agreement, we signed with SK still trying to bring on.
They've been a good supplier to us we want to formalize that so we've got multi supplier and we've seen tremendous growth out of that and we continue to add to our sales funnel on that and then if I go to the connectivity and fencing, we believe that's going to be our highest growth and we've talked before on calls about the success, we're having in ultra wideband to what we're doing with matter in our development kits.
We know Wi Fi is going to come back both for the handset as well as the access points. So we haven't backed away from our long term plans.
Very helpful and maybe for my follow up I think on the last call you had highlighted.
110 billion charge, if I recall correctly I was curious what's happened to that was paid was it negotiated.
Any other charges.
We should be aware of and is there any obsolescence risk on the inventory that you have.
Sure. Thanks for the question Vivek.
Ill take the.
The silicon question.
From last quarter, and then I'll roll it forward to this quarter. If you remember there was a $110 million charge last quarter.
In the K that we filed there was $2 2 billion of total purchase commitment liabilities that we had of which $1. Four was related to this particular silicon agreement. It currently stands at approximately $800 million, which remains on that particular agreement.
Given the demand that we are.
Including in our guidance looking forward, we were able to work with the supplier in that case in order to better match the supply coming in with the ultimate demand.
In our silicon so overall a very good story.
Very very solid partnership and working through.
That particular agreement.
Your next question comes from Karl Ackerman with BNP Paribas. Please go ahead.
Yes, Thank you gentlemen, I had.
I wanted to maybe first start off with a question period of Bob or Eric.
To what extent is corvo under shipping demand in the December quarter, particularly in handsets.
Related to that clearly volumes are impacting your utilization and margins.
But I guess, our asps on older generation devices coming down by a similar amount as we think about the December quarter Guide.
Our Aaron's note here, but Dave representing of our sales and marketing we will address your questions. If that's alright.
Yes. Thanks.
I'm not sure how much we can say how much we're under shipping demand. It's a combination of weak demand in the market, especially in the Android ecosystem on.
On top of the inventory that's built up in the channel that's being run off because we don't see pricing is a factor there is all knew about the units and the inventory.
Got it understood.
Maybe just to switch gears, if I could.
Certainly something away from mobile.
You did mentioned that Shouldnt carbide.
Agreement today I was hoping you could quantify the size <unk> capability of revenue you could support which you're still in carbide offering now that you've signed its long term supply agreement with GSK Shield Trump Andrew or the rest of your suppliers. Thank you very much.
Thank you for that again, we've got three different suppliers to suppliers for raw wafers, and we've got even more of that to the epitaxial. So this is a portion of that.
We haven't disclosed even the baseline business how large it is this year all I can tell you is it's growing significantly and we're very pleased with that acquisition, it's coming up on its first year anniversary and the <unk>.
Very pleased with how it's contributing to the overall performance on the top and bottom lines, but we're excited about the business. We've got a great product offering there I ran through a number of the different applications. We're in and we just continue to add to the sales funnel on that business and we just want a formalized with one of our suppliers in the longer term agree.
<unk>.
Yeah.
Yes.
Next question comes from Tim Arcuri with UBS. Please go ahead.
Hi, Thanks, I just jumped on late so I, just kind of wanted to get a sense of.
China and sort of how you see.
Things are progressing if youre willing to speak beyond June sorry beyond.
Calendar Q4, how you see.
The inventory digestion.
Digestion trending beyond.
Or do you think that March there'll still be some residual or is or is to separate the worst of it.
Thanks for the question, Tim we did cover.
The China revenue the percent of sales in the percentage.
That it will be down both quarter on quarter and year on year, which are substantial in.
In terms of the inventory and the time it will take to process through the inventory. We haven't made a formal statement about that but we have commented that Android based revenue in China is expected to be up in the March quarter, We havent provided formal guidance, but we do expect to see some.
Some increase.
In March.
Okay. Thank you so much.
Next question comes from Edward Snyder with Charter equity Research. Please go ahead.
Thanks, a lot I'll dig into the you mentioned the mid high band.
This combines with the transmit directs functions into a single module and a smaller footprint than what we had previously for the mid high band I'm, assuming its performances allowed you to reduce the size. In addition, a few of the things is this the new phase seven E module that I think a lot of your your especially your Android customers have been clamoring for to try to reduce.
And maybe even the cost to them of the RFP or is this done for a particular customer so any guidance or any color you can provide on how.
Widespread the attraction of that part might be would be helpful to start with and I had a follow up.
Yes.
Dave.
Phase <unk> is a different solution. So we talked about that earlier this year and we've ramped that with honor. We've got a lot of new customers peers in hand, we will start shipping more that in the beginning of next year.
Product you refer to the combined mid high band, mainly diversity, Pat that's a new product.
No.
Ramp probably in 2024, so thats more targeting.
High performance small form factor applications.
Really leverages <unk> strength optimized site performance and so we're working with some lead customers on that helping helping them define that architecture.
And drive that solution.
Great and then a follow up I mean, you have inventory problems appeared last year at this time pretty much.
And I know, it's impossible to tell you know I think there is a difficult to even understand how much inventory relative demands happened subsequently to that to make things worse.
We've now gone for 12 months, and it's not getting better getting worse at what point or is there a point, where you start writing off some of this inventory or is that all standard product it'll you'll sell just as well into 2020 for phones as it did.
Targeted for last year's and this year's fall and so I'm just trying to get a grasp of how long youre going to go with it before before or is it just selling through.
Thanks for the question Ed.
In terms of inventory and what we are writing off as <unk> or.
Our reserving against it is up significantly so that will be in our gross margin and our non-GAAP gross margin. So we are seeing that today.
If we believe anything was excess or obsolete we would've included in that.
So there's no expectation that there was something we missed I would also point out that we're doing the things that we can do to help manage that.
By reducing utilization.
In the factories were working with customers and suppliers were ordering less raw materials. For example is being selective where we choose to add value to inventory.
Looking forward.
I tend to look at finished goods and it's about 20% of our total MAU. It typically runs higher than that so that tells me that we are doing a good job at least on a historical basis of managing the situation tightly.
In terms of what we choose to build knowing that we're going to make sure. There is demand to consume it. So we're taking the steps that we need to take today and we're reserving against the excess in obsolete as we see it.
And then if I could follow one more one more.
On your largest customer might be a bright spot certainly it looked like it from their report for.
For the first quarter shipments et cetera is your content up up or down or flat relative just generally speaking.
To where it was last year.
Sorry, Ed.
Anything we've ever disclosed in the past I know you guys have a lot of fun trying to find a lot of our small parts that are in there, yes, we enjoyed a nice ramp with them.
And the last quarter.
Quite honestly, we are going to be down probably in all our major customers, obviously, including our China based customers in December <unk> factored all that into our outlook.
Okay.
But we were up year over year in the September quarter, with our largest customer.
Your next question comes from Matt Ramsay with Cowen. Please go ahead.
Thank you very much for taking my questions. Good afternoon, guys My first.
First one I was just kind of apologies. If this has been asked we were listening to you guys on Qualcomm at the same time, but one of the comment that there. He made was not only a weakening in smartphone demand overall, but.
Also a M.
I move that.
Customers in all geographies and tiers to carry a lower level of inventory and it sounded like that move had accelerated in the recent weeks and you guys are kind of going through this inventory correction with the China customers and I wonder if you've seen across the board that kind of trend, even an acceleration in lowering inventory levels at most of the customers.
Yeah.
Sure. This is Dave So I think that's natural Ryan anytime you get into this type of environment people are going to start to reduce their inventories because of the demand is not growing so.
I think that's a natural reaction and ensure we see some of those similar trends, but I also want to mention that we have pretty close.
Relationships with all our customers.
They are forecasting a modest business they placed purchase orders and we're working with each of them to kind of work through the inventory whether it's.
Sitting in our factory are sitting in our distribution channel or are obviously sitting in our customer shelves.
We worked through that with them on a case by case basis to make sure that that inventory gets consumed. So in those cases, there are often willing to take more inventory on their shelves out so all of those problems.
I'd only add to that that it's broader than just quote our China based customers just to be clear, it's broader than just our handset customers as well talked about Wi Fi whether it's access points are in the phones. So I just want to make sure.
Our audience I understand it's broader than what were just seeing in handsets.
No thanks for that and Bob that that was pretty consistent with the messaging from San Diego as well.
As my follow up grant I know the new segmentation and then you guys talked about the historical being.
Disclosed when the Q comes out, but I'd say in the guidance that you've provided for December if you could talk maybe a little bit more specifically about the new segments Directionally that would be helpful. Thanks.
Yes, sure. So the segments Directionally will follow a lot of what Bob's comments were previously right. We do expect them to be down sequentially into December .
You get now a good look at the profitability by each of those.
Different segments in terms of.
HPA.
<unk> recorded a 35% operating margin.
<unk> recorded a 34% operating margin, which wasn't far behind and then a slight loss on our on our CSP business, which is our highest growth biggest.
Biggest investment area.
I should say biggest investment area, sorry, the biggest investment area relative to revenue.
I should qualify that.
Thank you next question comes from <unk> Srivastava with BMO. Please go ahead.
Alright, Thank you very much.
A quick follow up on the segments, so what's tee.
The.
Connectivity segment operating margin was negative was kind of a normalized.
So this trend and then I had a quick follow up on the business.
Yes, sure. So it is relatively new but putting all the pieces together I would expect it to be profitable we are going to drive that business. Both in terms of the top line to increase the scale. So it can absorb the cost structure that it's Scott.
As well as you know.
Looking at the utilization in the factories so it's.
Building a lot of Wi Fi parts that come out of our Greensboro fab, which is highly underutilized at the moment. So it's constrained in that regard from an overall unit perspective.
Got it got it and then.
Click on the Android business I know you put out your China revenues in the in your filings.
What was the peak for the Android handset.
Got news going back a year ago.
Hi.
You bet.
So as your question on China, Baseband order, including our.
Other customers that are Invoiced based.
I think it's a good point you raised just the Android customer base, which is causing the biggest.
Thanks, or the biggest downshift.
And the trajectory of the business.
I can't speak to Android, specifically off the cuff, but I can tell you that our China based business as a percent of total revenue.
Was approaching 50% at the peak.
A good portion of the.
Great.
Okay got it got it that's what I was looking for thank you very much.
Thank you.
Next question comes from Blayne Curtis with Barclays. Please go ahead, hey, guys.
Thanks for taking my question.
It gets a little repetitive everybody was bounce around Tonight, So I apologize but.
Obviously Android needs substantial correction I was just kind of curious on that other customer theres been a lot of concerns but haven't seen anything concrete.
In this guide that is down sharply have you.
Change the way you are looking at that customer baked in.
Conservatism, obviously theres manufacturing issues, that's in the news as well as.
Concerns about their annual cuts.
Hi, Brian It's Bob I made a comment earlier.
We were up year over year with our largest customer but I also commented that in the December quarter, we are expecting to be down at all of our large customers, including our customers in China.
We also believe across our customers.
Their flagship phones are not immune to what we're seeing out there.
And consumer almost no matter what market segment, we're facing and we've got multiple products for more than just handsets.
We're seeing it declined.
That was some comments I made earlier.
Thanks, and then you made the comment that Android is up in March obviously Samsung.
<unk> has their ramp then.
A good quarter for that customer would you still expect the vocs to be correct. The inventory or is the comment that androids oven March because youre through that inventory and even the box could be up.
So number one I am glad you brought up our Korean customer and what's going on there I mean, we also commented that we picked up a low band pad in there.
<unk> phone and we're pretty happy about that that's new content, we've never gotten we did hit the low band pad and some of their high volume phones, but we hadn't been in the marquee phone and we've got a lot of extra content. There. So yes.
As they launch their next.
S level phone, we're going to do extremely well.
It's our expectations today that what we're seeing from China now again, we have to remember are they're rolling lockdowns, what's going to happen, but based on everything we see today, we do expect to be up there, but when you integrate all that with our largest customers typically down we're seeing some other weakness in other consumer businesses as we adjust the inventories thats why were not.
Predicting march yet but.
And I think we are at the point, where we feel just like we said last quarter. This was going to be the low point December for our Android based customers.
Next question comes from Christopher Rolland with Susquehanna.
Please go ahead.
Thanks for the question and Bob you just saw.
Stole my Thunder there around the low band.
Pad win that you had there.
Perhaps talk about that opportunity in low band is this expanding for you do you think.
And then and then just.
Just more generally maybe you can talk about the content growth opportunity that you guys see per five <unk> unit as we move into 2023 more generally.
Yeah.
Sure I'll take this one.
Good question and it's definitely a content gain for US we've never had the low band on their flagship model, where as Bob mentioned.
Some of their mass tier phones last year. This past year, we did get some of the low band sockets, but this is new for us in the flagship. So this will actually be the highest content we've ever had in that in that phone models. So we're pretty excited about that ramp starting early next year.
As far as additional content its hard to say I think it's consistent with what we said in the past.
I will say there is one area that I think is another exciting opportunity for us as we move into Wi Fi seven.
There's been a lot of cases and Wi Fi six for to.
It's integrated in the Src is sometimes good enough performance and they don't need an external firm, but we don't see that happening in Wifi service that we've got it.
Great.
Wi Fi Fam socket win on a major Asia based chipset platform provider on the reference design with our fans. So we're really excited about that that's definitely going to be a growth opportunity as we go forward.
Thanks for that and then.
As we all kind of piece together, what inventory digestion versus true lower demand.
Maybe this could be a helpful way to address that I think you gave a global handset unit number five G. I think you were at like 625 or something like that for the year.
Where do you see that now.
On perhaps reduced demand.
Sure. We commented that we think it will be approximately 600 million units now for calendar 'twenty, two sort of down approximately 25 million units coming out of December .
Next question comes from Rajeev <unk> with Needham <unk> Company. Please go ahead.
Yes, Thanks for taking my question and again I joined late so apologies. If this question was asked.
When we're looking at.
Calendar 'twenty three and two in terms of the overall market.
The.
I'm, just curious to see how what the Chinese handset.
Customers are thinking about a recovery year looks like in calendar 2023.
The designs for phones are six to nine months in the future. So I'm. Just wondering is there any feedback that maybe you could provide.
What a recovery could look like the calendar 'twenty three of <unk>.
$600 million kind of <unk> market this year and any thoughts on that.
Okay.
I think what's important and it's a good question and then if I can answer that I know a lot of you will be super impressed to fly was actually accurate.
I think what we've focused on is the design activity to your point.
<unk> been working on and we're quite encouraged by the number of new phones, and obviously, our design wins that are there and the amount of content that they're putting into their phones. It's just what youre really asking is the number of units.
And let's let's just go through their markets the China consumers at an all time low right now.
Everybody had hoped after president XI was elected to the next term low back away from the zero Covid policy, we haven't seen that yet so what's the China market is going to look like their major export market.
Lot of that is eastern Europe .
Warren Ukraine doesn't look like it's slowing down so they have to factor that in and then you put it in place they're strong in Europe as well.
You look at inflation and what they are seeing over there so until a lot of those things get under control, they're not leaning forward. Okay. What they are doing is continue to design new phones, we work with them on that we get those wins. Many of those are some of the same products. We're shipping today many of some of the new products that we've also talked about so very different.
To project 23, but we feel good about is our design wins are market shares consistent or higher as we go forward. The number of units, we will just have to wait and see.
Got it understood and my follow up.
Last quarter, you were cutting utilization to kind of stope inventory burn I don't believe you you quantified that you might've quantify it on this call.
But I'm just curious how is how are you thinking about.
Ramping down utilization rates at your internal fab.
And.
And kind of what the impact would be on the on the margin front. Thank you.
Sure. Thanks for the question I touched on it a bit earlier in terms of utilization by location.
There are different businesses, which impact different factories and in various ways based on product mix that we see running through those those factories. So in aggregate it's.
It's difficult if not misleading to quota a particular number and we haven't done that in the past for that reason, but but I can say that underutilization is significant it is having a.
Sure.
Meaningful impact on our gross margin to the tune of greater than 700 basis points.
So adding that back as I talked about earlier it gets us on path to our 50% plus gross margin looking forward.
Your next question comes from Vijay Rakesh with Mizuho. Please go ahead.
Yeah, Hi, guys. Just wondering I know you talked about maybe March quarter, we start to see.
Some growth.
Okay got that right, but is that predicated more on.
Ex China growth or how are you seeing that because you know as Bob as you mentioned might be.
Some of these COVID-19 restrictions could continue into next year right.
Yes, let me clarify that.
On aggregate, we're not commenting on the March quarter.
In terms of weather, which showed growth, but on a customer basis.
Seasonally we would expect our largest customer to be down.
Do expect Android based business to be up and there will be some offset between those two that were not <unk>.
Forecasting at this point publicly and the rest of our businesses are expected to be approximately flat with some specific strength on the area as Bob touched on earlier.
Got it and then on the inventory side I was wondering if you'd comment on what the channel inventory levels.
Where do you see it exiting December versus normal levels.
Similarly, where do you think.
Customer a handset.
Customer OEM inventories on.
On the RF components.
<unk>.
Yes, I am sorry was the question, referring to China or.
In General wireless Shannon Shannon read please.
Are you seeing in terms of RF component levels.
Shame on you if you're a customer.
Where do you think inventories are.
As you exit the December quarter lets see.
Yes, it's hard to put a number on it because it varies by market and by customer and product area.
In some cases, we have customers that are reasonably healthy in terms of the inventory they're carrying.
And others.
A lot of inventory that they've got to work through and then in some cases, we have distributors in between.
Kind of a mixed bag as well.
What I'd add to that is unfortunately every quarter.
Our customers and chasing demand down for the various global effects that we talked about three major themes inflation the war.
Lockdowns in China so.
Unfortunately every time they have been wrong and they thought they were reducing it enough when they werent there still overbuilt so.
We'll just have to wait and see how this thing what I think is great as they are paying close attention to it and as Dave pointed out we've got a great relationships with our customers and we're working with them to work through this.
Thank you I would like to turn the floor back to management for closing remarks.
We want to thank everyone for joining us today, we look forward to speaking with you again in upcoming Investor events. Thanks, again, and hope you have a good night.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
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